FSB publishes final report of the evaluation of too-big-to-fail reforms for banks

31 March 2021

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Ref no: 5/2021

The Financial Stability Board (FSB) today published the final report on its evaluation of the effects of too-big-to-fail (TBTF) reforms for systemically important banks (SIBs). The evaluation examines the extent to which the reforms have reduced the systemic and moral hazard risks associated with SIBs, as well as their broader effects on the financial system.

The evaluation finds that TBTF reforms have made banks more resilient and resolvable, and that they have produced net benefits to society. Indicators of systemic risk and moral hazard moved in the right direction, suggesting that market participants view these reforms as credible. Increased bank resilience and greater market discipline have been tested by the COVID-19 pandemic. However, banks – thanks also to the unprecedented fiscal, monetary and supervisory support measures – have so far been able to absorb the shock.

Nevertheless, the evaluation finds some gaps that need to be addressed:

  • Resolution reforms should be implemented in full to enhance the feasibility and credibility of resolution, minimising the need for state support of failing banks. This includes further work to enhance the resolvability of SIBs.

  • There is still scope to improve public disclosures of information relating to resolution frameworks and funding mechanisms, the resolvability of SIBs and resolution actions.

  • information may be needed for public authorities to assess the potential impact of resolution actions (such a bail-in) on the financial system and the economy.

  • The application of the reforms to domestic systemically important banks warrants further monitoring. In addition, risks arising from the shift of credit intermediation to non-bank financial intermediaries should continue to be closely monitored.

Claudia M. Buch, Vice-President of the Deutsche Bundesbank and chair of the group that produced the report, said: “Having robust banks and a mechanism to resolve them in the event of failure is key to maintaining financial stability. While the evaluation highlights the progress we have made, more can be done to fully realise the benefits of these reforms. I look forward to further work by the FSB and standard-setting bodies to close the gaps we have identified”.

Notes to editors

Following the global financial crisis, the G20 launched a comprehensive programme of financial reforms to increase the resilience of the global financial system, while preserving its open and integrated structure. In order to assess the effects of these reforms, the FSB published a framework for the post-implementation evaluation of the effects of the G20 financial regulatory reforms in July 2017.

In May 2019, the FSB launched an evaluation of too-big-to-fail reforms as they apply to banks. The TBTF reforms that were evaluated have three components: (i) standards for additional loss absorbency in the form of capital surcharges and total loss-absorbing capacity requirements; (ii) recommendations for enhanced supervision and heightened supervisory expectations; and (iii) policies to put in place effective resolution regimes and resolution planning to improve the resolvability of banks.

This final report reflects feedback received on a consultative version of the report, which the FSB published in June 2020. It contains analytical updates using market data, covering the period since the outbreak of the COVID-19 pandemic, as well as more extensive analysis of the issues raised in the consultation.

The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of effective regulatory, supervisory, and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with approximately 70 other jurisdictions through its six Regional Consultative Groups.

The FSB is chaired by Randal K. Quarles, Vice Chairman, US Federal Reserve; its Vice Chair is Klaas Knot, President of De Nederlandsche Bank. The FSB Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

Evaluation of the effects of too-big-to-fail reforms: Final Report

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This final report reflects feedback and more extensive description of issues raised in public consultation, as well as analytical updates since the outbreak of the COVID-19 pandemic.

Summary of document history

Summary of document history

This final report reflects feedback and more extensive description of issues raised in public consultation, as well as analytical updates since the outbreak of the COVID-19 pandemic.

The Financial Stability Board (FSB) today published the final report on its evaluation of the effects of too-big-to-fail (TBTF) reforms for systemically important banks (SIBs). The evaluation examines the extent to which the reforms have reduced the systemic and moral hazard risks associated with SIBs, as well as their broader effects on the financial system.

The evaluation finds that TBTF reforms have made banks more resilient and resolvable, and that reforms have produced net benefits to society. Indicators of systemic risk and moral hazard moved in the right direction, suggesting that market participants view these reforms as credible. Increased bank resilience and greater market discipline have been tested by the COVID-19 pandemic. However, banks – thanks also to the unprecedented fiscal, monetary and supervisory support measures – have so far been able to absorb the shock.

Nevertheless, the evaluation finds some gaps that need to be addressed:

  • Resolution reforms should be implemented in full to enhance the feasibility and credibility of resolution, minimising the need for state support of failing banks. This includes further work to enhance the resolvability of SIBs.

  • There is still scope to improve public disclosures of information relating to resolution frameworks and funding mechanisms and resolution actions. Additional information, for example on Total Loss Absorbing Capital (TLAC) holdings, could enable public authorities and market participants to assess the potential impact of resolution actions.

  • The application of the reforms to domestic systemically important banks warrants further monitoring and improvements in data.

  • The report also highlights that, in response to TBTF reforms, risks associated with credit intermediation may have shifted to non-bank finance. Following up on its Holistic Review of the March 2020 market turmoil, the FSB has embarked on a comprehensive work programme to enhance the resilience of non-bank financial intermediation.

Claudia M. Buch, Vice-President of the Deutsche Bundesbank and chair of the group that produced the report, said: “Higher capital for systemically important banks is key for financial stability, and the report shows no material negative side effects. But we also need mechanisms to restructure and resolve banks in stress. While the evaluation highlights the progress we have made, more can be done to fully realise the benefits of these reforms. I look forward to further work by the FSB and standard-setting bodies to close the gaps we have identified”.

Evaluation of the effects of too-big-to-fail reforms: Overview of Responses to the Public Consultation

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Summary of document history

Summary of document history

On 28 June 2020 the FSB published a consultative document on the evaluation of the effects of the too-big-to-fail reforms for systemically important banks. The FSB received 28 written responses from a variety of stakeholders. This document summarises the responses received and sets out the main changes made to the evaluation report as a result.

Principles for the Sound Management of Operational Risk

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The BCBS recognises that the exact approach for operational risk management chosen by an individual bank will depend on a range of factors, including its size and sophistication and the nature and complexity of its activities. However, despite these differences, clear strategies and oversight by the board of directors and senior management, a strong operational risk culture and internal control culture (including, among other things, clear lines of responsibility and segregation of duties), effective internal reporting, and contingency planning are all crucial elements of an effective operational risk management framework for banks of any size and scope. The document outlines a set of principles that provide a framework for the effective management and supervision of operational risk, for use by banks and supervisory authorities when evaluating operational risk management policies and practices. It details eleven principles of sound operational risk management covering governance, risk management environment, and the role of disclosure.

Principles for operational resilience

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The principles aim to strengthen banks’ ability to withstand operational risk-related events that could cause significant operational failures or wide-scale disruptions in financial markets, such as pandemics, cyber incidents, technology failures or natural disasters. The approach builds on revisions to the BCBS , and draws from previously issued principles on corporate governance for banks, as well as outsourcing-, business continuity- and relevant risk management-related guidance.

FSB Middle East and North Africa group discusses financial market developments and enhancing cross-border payments

24 March 2021

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Ref no: 4/2021

The Financial Stability Board (FSB) Regional Consultative Group (RCG) for the Middle East and North Africa (MENA) held its 19th (virtual) meeting today to discuss financial stability issues affecting the region, including those stemming from recent developments associated with the COVID‑19 pandemic.

Members also exchanged views on some of the challenges in assessing the effectiveness of policy measures to support those parts of the economy most vulnerable to the pandemic and in creating an exit strategy from temporary support. Members reiterated the importance of international cooperation to evaluate and coordinate the policy responses, including considerations for their future unwinding.

The group received an update on the FSB’s work programme, including planned deliverables to the G20 during the Italian G20 Presidency in 2021, also incorporating follow-up on initiatives begun during the Saudi Arabian G20 Presidency in 2020. Key FSB deliverables for 2021 include: a report on lessons learned from financial policy responses to COVID-19; work on strengthening the resilience of non-bank financial intermediation (NBFI); implementing the G20 roadmap to enhance cross-border payments; transitioning away from LIBOR; strengthening cyber and operational resilience; and analysing and addressing climate-related financial risks.

RCG MENA members explored ways to contribute to the FSB’s work, in particular to the G20’s roadmap on enhancing cross-border payments. The roadmap provides a set of actions, with milestones, to make cross-border payments faster, cheaper, more transparent, and more inclusive. Members discussed, as part of the work on the roadmap, the steps being taken to strengthen regulation, supervision and oversight of global stablecoins arrangements. Members looked forward to continuing their discussions on enhancing cross-border payments at their workshop on instant payments the following day, when they would also benefit from exchanging views and experiences from private sector participants.

Notes to editors

The FSB RCG for the Middle East and North Africa is co-chaired by Fahad Almubarak, Governor of the Saudi Central Bank, and Rasheed Al-Maraj, Governor of the Central Bank of Bahrain. Membership includes financial authorities from Algeria, Bahrain, Egypt, Jordan, Kuwait, Lebanon, Morocco, Oman, Qatar, Saudi Arabia, Tunisia, Turkey and the United Arab Emirates.

The FSB has six Regional Consultative Groups, established under the FSB Charter, to bring together financial authorities from FSB member and non-member countries to exchange views on vulnerabilities affecting financial systems and on initiatives to promote financial stability.1 Typically, each Regional Consultative Group meets twice each year.

The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of effective regulatory, supervisory, and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 25 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with approximately 70 other jurisdictions through its six Regional Consultative Groups.

The FSB is chaired by Randal K. Quarles, Vice Chairman, US Federal Reserve Board; its Vice Chair is Klaas Knot, President of De Nederlandsche Bank. The FSB Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

  1. The FSB Regional Consultative Groups cover the following regions: Americas, Asia, Commonwealth of Independent States, Europe, Middle East and North Africa, and sub-Saharan Africa. [←]

COVID-19: a watershed for the FSB’s work agenda

18 March 2021 | PDF full text (113 KB)

Remarks by Dietrich Domanski at the launch of the International Regulatory Strategy Group’s (IRSG) latest report entitled, ‘Global Solutions to Global Problems: Promoting Regulatory Coherence in Financial Services for Pandemic Recovery’.

FSB publishes peer review on implementation of over-the-counter derivatives market reforms in Indonesia

26 February 2021

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Ref no: 3/2021

The Financial Stability Board (FSB) today published its Peer Review of Indonesia. The review examines steps the authorities have taken to implement over-the-counter (OTC) derivatives market reforms in Indonesia, including by following up on relevant G20 commitments.

Indonesia’s OTC derivatives market is relatively small, both compared to its economy and from a global perspective, but has been steadily growing over the past five years. Foreign exchange (FX) derivatives are by far the largest OTC derivatives class, followed by interest rate and commodity derivatives. Domestic banks, including local subsidiaries of foreign banking groups and local branches of foreign banks, are the most active market participants.

The review finds that the Indonesian authorities have made some progress in implementing OTC derivatives reforms, while focusing on developing their domestic derivatives market. Reporting requirements have been in place for banks’ OTC FX and interest rate derivatives transactions and for other participants’ commodity derivatives transactions for many years, and there is effective sharing and use of the data collected among domestic authorities. Progress continues on central clearing requirements and margin requirements for non-centrally cleared derivatives (NCCDs), and the authorities are appropriately prioritising these areas over establishing platform trading. The report notes the authorities’ continued progress on these reforms despite pressures in the wake of the COVID-19 pandemic.

Notwithstanding this progress, the review concludes that further steps can be taken by:

  • improving the reporting, use and public transparency of OTC derivatives data, including a timeline for adopting unique global identifiers for entities, transactions and products;

  • addressing legal uncertainties relating to netting for derivatives transactions in bankruptcy in order to facilitate central clearing and margin requirements; and

  • implementing the remaining OTC derivatives reforms (central clearing of standardised OTC derivatives, margin requirements for NCCDs, and capital requirements for exposures to central counterparties) in an appropriately sequenced manner.

The peer review report includes recommendations to the Indonesian authorities in order to address these issues.

Notes to editors

FSB member jurisdictions have committed to undergo periodic peer reviews to evaluate their adherence to international financial standards. To fulfil this responsibility, the FSB has established a regular programme of thematic and country reviews, based on the objectives and guidelines set out in the Handbook for FSB Peer Reviews. As part of this commitment, Indonesia volunteered to undergo a peer review in 2020. This review forms part of the second round of country peer reviews of FSB member jurisdictions, which examine the implementation of G20 financial regulatory reforms. All completed peer review reports are available on the FSB website.

The draft report was prepared by a team of experts from FSB member institutions and led by Daphne Doo, who at the time of the review was Senior Director, Supervision of Markets, Hong Kong Securities and Futures Commission. The review benefited from dialogue with the Indonesian authorities and private sector representatives as well as from discussion in the FSB Standing Committee on Standards Implementation.

The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of effective regulatory, supervisory, and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with approximately 70 other jurisdictions through its six Regional Consultative Groups.

The FSB is chaired by Randal K. Quarles, Vice Chairman, US Federal Reserve; its Vice Chair is Klaas Knot, President of De Nederlandsche Bank. The FSB Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.